Godongwana warns of more tax pain for South Africa

 ·5 Sep 2023

Finance Minister Enoch Godongwana has hinted at possible tax increases to fund the government’s growing expense bill.

Speaking at News24’s 2023 On The Record Summit, Godongwana said South Africa’s economic growth and tax revenue had been stifled by the energy and rail crisis, which has reached record levels of load shedding and logistics backlogs.

Various big business stakeholders, such as food producers, retailers, and manufacturers, have noted the collective billions of rands they’ve had to spend to escape crippling power cuts – undercutting any revenue gains and, therefore, potential tax contributions.

A study by the GAIN Group said inefficiencies at Transnet are costing the economy R1 billion a day, meaning the economic growth of 0.5% expected for 2023 could have been ten times higher at 5.4%.

With commodity prices sliding and growth weakening on load shedding and logistics constraints, the latest monthly figures from the Treasury show corporate tax receipts have declined by more than 20% since a year ago, while the unbudgeted public sector wage settlement has driven up spending.

Therefore, the government’s revenue for this financial year is projected to be significantly lower than initial estimates.  

The National Treasury revealed that the budget moved to a deficit of R143.8 billion for July, the largest since 2004 and wider than the R115.5 billion forecast by economists.

If the current pace of underperformance in tax collections is sustained throughout the year, gross tax revenue will be R82 billion lower than the February projection.

Godongwana said there are three ways to address the revenue shortfall and fiscal deficit.

  • Increase taxes, which is challenging and unpopular.
  • Borrow more money, which is limited, and
  • Budget cuts, which also have limitations before hurting the system.

I suspect you may need a combination of these instruments moving forward. You will probably get that on 25 October during the medium-term budget policy statement,” he said.

The Finance Minister said the task of balancing the budget is made more difficult because of the general elections next year.

“During an election, nobody wants to increase taxes, but everybody wants to increase expenditure to buy votes. You can’t have both,” he said.

“I said in February that if some of the things we are funding now become a permanent fixture, we must find a revenue source for them.”

He referred to things like the R350 social Relief of Distress grant (SRD Grant), which was introduced during the Covid-19 pandemic.

Over the weekend, President Cyril Ramaphosa said the R350 grant laid the foundation for introducing a basic income grant.

He said the successful implementation of the R350 grant has shown that the government can roll out a basic income grant of a similar nature.

Godongwana cautioned against thinking that things that were easily funded during a commodity boom and revenue overruns can continue.

The tax base is already overstretched

While Godongwana noted that they would review revenue avenues – including possible tax changes – Efficient Group chief economist Dawie Roodt believes there is no more wiggle room for such increases.

According to Efficient Group’s data, the three most significant contributors to government’s tax revenue are personal income tax (PIT), value-added tax (VAT), and Corporate Income Tax (CIT).

Of the R1.95 trillion, PIT contributes R640 billion (33%), VAT accounts for R471 billion (24%), and CIT provides R336 billion (17%).

However, only 1.12% of taxpayers (roughly 163,702 South Africans) pay 30% of total personal income taxes in the country, while 19% pay a whopping 87% of total personal income taxes.

Additionally, a staggering 0.09% of corporate taxpayers (only 770 companies) pay 62.5% of total CIT, with 4.4% paying 95% of total corporate income taxes.

“This means the country has an alarmingly narrow tax base, which is a massive concern for the state’s finances. You cannot increase this.

“If this increases, the tax base will collapse as many of the 1.12%, as well as businesses, will simply leave the country – which they are already doing,” said Roodt.

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